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Types of shares and their issuance

If you have decided to start a company, you must be aware of certain things to sustain your company financially. shares and Issuance of shares is one that can come with the incorporation and may have significant long-term implications. Investing in shares is the most popular way of generating long-term wealth and fulfilling your financial goals.  

In this article, we will discuss shares, types of shares, and the process of issuing the shares.

Table of content

  • What are shares?
  • What is the issuance of shares?
  • Types of share?
  • Process of issue of shares
  • Key takeaways

What are shares?

A share is a certain percentage or portion of ownership in a company or a small equal unit of the company’s capital. It is the proof of ownership of part of the company. The more shares a person has, the more the company owns.

When an investor buys shares in your company, they become one of its shareholders or owner. As a result, the shareholders are involved in making the company’s key decisions. such as selling a business, partnership in the businesses, and financial decisions.

Issuance of shares

Issuance of shares is the procedure in which companies issue shares to raise money from the investors. Investors who want to invest their money buy shares from the company. Thus, this money is used by companies for growth and development.

The different types of shares issued by the company are as under:

Types of shares

The two main types of share are :

  • Equity shares
  • Preference shares

Equity shares

Equity shares are also known as ordinary shares. They are standard shares with no restrictions and special rights. The owners/shareholders of equity shares essentially own the business as they have the right to vote and manage the company. Equity share can be further divided based on:

  • Share capital 
  • Definition 
  • Returns

Equity share based on share capital

Here is the classification of equity shares based on share capital

  • Authorized share capital 

A maximum amount of capital that a company can issue to the shareholders as agreed in its article of association. Authorized share capital is also called authorized stock, authorized share, or authorized share stock.

  • Issued share capital

Issued share capital is the shares sold to and held by a company’s investors. The number of issued shares corresponds to the amount of subscribed share capital, and the amount can’t exceed the authorized amount.

  • Subscribed share capital

The shares that investors have promised to buy. It is the monetary value for which investors have expressed an interest.

  • Paid-up capital 

The amount of money paid by the investors to hold the company’s stock.

Types of shares and their issuance

Equity shares based on the definition 

Here is the classification of equity shares based on the definition

  • Bonus shares

Those additional shares that the company gives to its existing shareholders without any additional cost are based on shares owned by them.

  • Rights shares

New shares are provided by a company to its existing shareholders at a discounted price within a specific period.

  • Sweat equity shares  

A discount shares issued by a company to its employees and directors at a discounted rate or for a consideration other than cash.

  • Non-voting shares

A non-voting share in a company’s capital belongs to a class with no voting rights.

  • Voting shares 

The shares give the stockholders the right to vote on matters of corporate policymaking.

Equity shares based on returns

  • Dividend shares

A dividend is a distribution of the company’s earnings to its shareholders in the form of issuing new shares, determined by its board of directors.

  • Growth shares

Growth shares are the shares given by a company to non-employees. They have a low or nil value until a company reaches a certain target.

  • Value shares

Value share appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, and sales.

Preference shares

Preference shares are commonly known as preferred stock in which shareholders have the right to receive a fixed amount of dividend every year. They receive the dividend before it can be paid out to common stockholders.

  • Cumulative and non-cumulative preference share

Cumulative shareholders have the benefit that if a company doesn’t declare a dividend in the current year, then the company has obligation to pay it in the next financial year. In contrast, non-cumulative is a type of preferred share that has no provision for payment of the previous year’s dividend in the next financial year if it is not declared in the current year. 

  • Participating and non-participating shares 

Participating shares provide an additional profit to the shareholders, and non-participating shares don’t provide such a benefit, apart from the regular receipt from dividends.

  • Convertible and non-convertible preferences share

Convertible preferred shares can be converted into equity shares, but non-convertible preferred shares do not.

  • Redeemable and irredeemable preferences share

Redeemable preference shares can be repurchased and claimed at a fixed price and time. On the other hand, irredeemable preference shares have no such conditions.

Process of issue of shares            

The process of issuing shares is divided into three following steps:

  1. Issuing prospectus
  2. Application of shares
  3. Allotment on share 
  4. Call on share

Issuing prospectus

In the first step of issue of shares, the company releases a prospectus to the public to buy the company’s shares. This prospectus contains all the necessary information about the company, including the share issuing authority and the procedure to collect money from the investors.

 Application of shares

This is the second step of issuing share in which investors follows the company’s rules and regulation as mentioned in the prospectus. Then, when investors wish to purchase a share of the company, they deposit the application fee against the share they are willing to purchase.

Allotment of shares

In the last step, investors complete the formalities and the company will issue the share to the investor by issuing an allotment letter. The allotment letter is only be issued to applicants whose share application is being accepted.

Call on shares

It is the request made by a company on its shareholders to pay a whole or partial amount on the shares. The number of calls first, second and final depends on the installment number.

Key takeaways

  • A share is a certain percentage or portion of ownership in a company or a small equal unit of the company’s capital.
  • Moreover, shares are essential for the development and growth of the company 
  • In the equity shares, there are no restrictions and special right

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